The feed price formula used in the proposed Dairy Security Act (DSA) to compute the margin insurance program fails to address the reality of what dairies pay for feed in their own regions, leaving California operations with an inadequate safety net, the CEO of Western United Dairymen (WUD) says.

Writing in the Nov. 4 edition of WUD’s “Weekly Update,” Michael Marsh says his group met with National Milk Producers Federation (NMPF) in 2009 to discuss Western concerns about the impact of proposed dairy reform on California producers.

“We felt that the feed cost in a margin insurance program would work better for the intended beneficiaries of the safety net if feed costs were calculated based upon where the cows were being fed and milked rather than where the feed was grown,” Marsh notes. “Unfortunately, when the DSA -- the legislative version of Foundation for the Future -- was introduced, it was not included.”

During the dairy crisis of 2008-2010, Marsh says, the dairy industry “threw every tool we could find in our toolbox at the downturn to try and right the ship that was sinking fast. We threw the price support at it, the Milk Income Loss Contract, the Dairy Export Incentive Program, the Cooperatives Working Together, and food donations as well as another $350 million from Senate Ag Appropriations.”

Although more than $2 billion in aid was marshaled, it wasn’t enough, he says. “The new 10-year baseline for dairy is only $672 million, and we’re anticipating an even deeper cut from the “Super Committee,” Marsh notes. “Will that be enough for the next crisis?”

WUD’s board was intrigued in 2009 as discussion emerged about a new safety net that might provide protection to producers in the future. The California-based organization talked to its Capitol Hill friends, who were also interested in a new safety net for dairy. Focus turned to whether dairy policy reform might be able to insure a margin for producers and what dairy margin insurance might look like.

NMPF shared its proposed idea with WUD. “Our economist crunched the numbers and what fell out of the number crunching was a concern for California,” Marsh says. “Milk prices are what they are and a part of the calculation used when examining a margin. At the same time, we noted that California’s feed costs were much higher than what NMPF proposed using in their margin calculations.”

In November 2009, WUD leaders met with NMPF’s board chairman, its CEO, Jerry Kozak, and NMPF staff to discuss concerns with how their margin impacted California producers.

“NMPF indicated they couldn’t do a state-by-state or a regional approach to feed costs, and we agreed,” Marsh writes.

But WUD leaders were disappointed to see their concerns were not addressed in the resulting DSA.

“The Central Illinois soybean price is not the price farmers in Washington or California pay for meal,” Marsh notes. “The USDA/NASS average hay price is not the price Vermont or Florida farmers pay for alfalfa. The USDA/NASS average corn price is not the price dairy producers in Idaho, Texas or Pennsylvania fork over for the yellow gold. These prices are what is used in the DSA to compute the margin, and these prices are set where the feed is grown, ignoring the reality of what the folks who invest in the cows pay for feed where the cows are milked.”

Over the past five years, California’s average feed cost has exceeded the cost the DSA utilizes by $1.40 per cwt. “DSA advertises that producers will have a $4 margin insured by the program,” he says. “But will they?”

Months ago, WUD offered NMPF a proposal to base feed costs on the costs actually experienced by the people who invest in the cows, the parlors and the barns. WUD has propsed using the average feed cost of the top 10 dairy states to mitigate the negative consequence of a feed cost in the program based upon where feed is grown rather than where the cows are milked.

“Based on that average feed cost difference, would a $2.60 margin be enough for California producers?” asks Marsh. “Should we try to do better, or just take it as is? We think we can do better.”